Thoughts on the Recovery Stimulus

*"The bet being made by the United States on the outcome of the stimulus package is a bet on the idea that wealth is not defined simply by the number of dollars, but also by the flow of dollars and the trust of citizens that they can exchange dollars for what they need. Wealth creation is a result of a predictable rate of flow and of trust sustained over time. Wealth destruction results from economic turbulence or loss of trust in money."

Gimme later expanded the dialectic using the gambling metaphor:

So the economy is like a river, and it is also like a game of poker in a casino. To extend the mixed metaphor:

LIKE A RIVER: If the flow undergoes drastic and unpredictable changes, especially if there are interruptions in the circulation of money because some people are hoarding it, then people get scared that they won't be able to dip into the stream (get credit or income). A trickle is not enough, as we have seen in these years since the 1980s.

So a failure of flow kills trust, but it works the other way too. When people are scared to take on debt for fear of losing their jobs, they stop spending on things like new cars. The stream we call the the auto industry dries up, and jobs are lost in a self-perpetuating cycle.

LIKE CASINO POKER: The new administration has to try to play the game decisively to convince all the players it's in control and that they can therefore trust the house's rules. It has to try also to prime the flow. The game could be lost for everyone involved by "the House" priming too little (betting too little), thereby failing to make a sufficiently profound impression on investors and consumers who need to believe there is still something that they can win by playing. Betting too much has its potential problems too. What happens to the game if the House loses too much and can no longer afford to cover bets for all players? We'll deal with that later. We're in too deep to stop the game now and lock in our losses.

The House has a stake in seeing that nobody keeps taking home all the chips (not even the House!), lest all the other players drop out and the game stops, because nobody's willing to place bets. Look at how angry people are that Bernie Made-off with so much of everyone's money! He and the AIG execs are accused of cheating, and that ruins the game.

So everybody wins so long as the game doesn't stop and as long as nobody wins it all.

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